Chapter 13, Problem 4P

1.

To determine

Compute Ratios for the given companies using the given financial statements.

Explanation of Solution

Calculate the ratios for Company BW

Ratio	Formula	Calculation	Result
Profitability ratios
Return on Equity (ROE)	$\frac{\text{Net}\text{Income}}{\text{Average}\text{Total}\text{Stockholder'}\text{Equity}}$	$\frac{\$45,000}{\left(\begin{array}{l}\$148,000+\$29,000+\\ \$61,000\end{array}\right)}$	18.91%
Return on Assets (ROA)	$\frac{\text{Net}\text{Income}}{\text{Average}\text{Total}\text{Assets}}$	$\frac{\$45,000}{\$402,000}$	11.19%
Gross profit percentage	$\frac{\text{Gross Profit}}{\text{Net Sales Revenue}}$	$\frac{\left(\$447,000-\$241,00\right)}{\$447,000}$	7.72%
Net profit margin	$\frac{\text{Net}\text{Income}}{\text{Net Sales Revenue}}$	$\frac{\$45,000}{\$447,000}$	10.07%
Earnings per share (EPS)	$\frac{\text{Net}\text{Income}}{\left(\begin{array}{l}\text{Weighted Average Number of }\\ \text{common Shares Outstanding}\end{array}\right)}$	$\frac{\$45,000}{\left(\$148,000÷\$10\text{per Share}\right)}$	$3.04
Total asset turnover	$\frac{\text{Net}\text{Sales}\text{Revenue}}{\text{Average}\text{Total}\text{Assets}}$	$\frac{\$447,000}{\$402,000}$	1.11
Fixed asset turnover	$\frac{\text{Net}\text{Sales}\text{Revenue}}{\text{Average}\text{Net}\text{Fixed}\text{Assets}}$	$\frac{\$447,000}{\$140,000}$	3.19
Receivables turnover	$\frac{\text{Net Credit}\text{Sales}}{\text{Average}\text{Net Receivables}}$	$\frac{\$149,000}{\$38,000}$	3.92
Inventory turnover	$\frac{\text{Cost of Goods Sold}}{\text{Average Inventory}}$	$\frac{\$241,000}{\$99,000}$	2.43
Liquidity ratios
Current ratio	$\frac{\text{Current}\text{Assets}}{\text{Current}\text{Liabilities}}$	$\frac{\left(\$41,000+\$38,000+\$99,000\right)}{\$99,000}$	1.8
Quick ratio	$\frac{\text{Quick}\text{Assets}}{\text{Current}\text{Liabilities}}$	$\frac{\left(\$41,000+\$38,000\right)}{\$99,000}$	0.8
Cash ratio	$\frac{\text{Cash \& Cash Equivalents}}{\text{Current}\text{Liabilities}}$	$\frac{\$41,000}{\$99,000}$	0.41
Solvency ratio
Debt-to-equity ratio	$\frac{\text{Total}\text{Liabilities}}{\text{Total}\text{Stockholder's}\text{Equity}}$	$\frac{\left(\$99,000+\$65,000\right)}{\left(\begin{array}{l}\$148,000+\$29,000+\\ \$61,000\end{array}\right)}$	0.69
Market ratios
Price/Earnings (P/E) ratio	$\frac{\text{Market Price per Share}}{\text{Earnings}\text{per Share}}$	$\frac{\$22}{\$3.04}$	7.24
Dividend yield ratio	$\frac{\text{Dividend per Share}}{\text{ Market Price per Share}}$	$\frac{\left(\$33,000÷14,800\text{Shares}\right)}{\$22}$	10.14%

Table (1)

Calculate the ratios for Company PF

Ratio	Formula	Calculation	Result
Profitability ratios
Return on Equity (ROE)	$\frac{\text{Net}\text{Income}}{\text{Average}\text{Total}\text{Stockholder'}\text{Equity}}$	$\frac{\$91,000}{\left(\$512,000+\$106,000+\$71,000\right)}$	13.21%
Return on Assets (ROA)	$\frac{\text{Net}\text{Income}}{\text{Average}\text{Total}\text{Assets}}$	$\frac{\$91,000}{\$798,000}$	11.40%
Gross profit percentage	$\frac{\text{Gross Profit}}{\text{Net Sales Revenue}}$	$\frac{\left(\$802,000-\$400,00\right)}{\$802,000}$	50.13%
Net profit margin	$\frac{\text{Net}\text{Income}}{\text{Net Sales Revenue}}$	$\frac{\$91,000}{\$802,000}$	11.35%
Earnings per share (EPS)	$\frac{\text{Net}\text{Income}}{\left(\begin{array}{l}\text{Weighted Average Number of }\\ \text{common Shares Outstanding}\end{array}\right)}$	$\frac{\$91,000}{\left(\$512,000÷\$10\text{per Share}\right)}$	$1.78
Total asset turnover	$\frac{\text{Net}\text{Sales}\text{Revenue}}{\text{Average}\text{Total}\text{Assets}}$	$\frac{\$802,000}{\$798,000}$	1.01
Fixed asset turnover	$\frac{\text{Net}\text{Sales}\text{Revenue}}{\text{Average}\text{Net}\text{Fixed}\text{Assets}}$	$\frac{\$802,000}{\$401,000}$	2.0
Receivables turnover	$\frac{\text{Net Credit}\text{Sales}}{\text{Average}\text{Net Receivables}}$	$\frac{\$267,333}{\$31,000}$	8.62
Inventory turnover	$\frac{\text{Cost of Goods Sold}}{\text{Average Inventory}}$	$\frac{\$400,000}{\$40,000}$	10.00
Liquidity ratios
Current ratio	$\frac{\text{Current}\text{Assets}}{\text{Current}\text{Liabilities}}$	$\frac{\left(\$21,000+\$31,000+\$40,000\right)}{\$49,000}$	1.88
Quick ratio	$\frac{\text{Quick}\text{Assets}}{\text{Current}\text{Liabilities}}$	$\frac{\left(\$21,000+\$31,000\right)}{\$49,000}$	1.06
Cash ratio	$\frac{\text{Cash \& Cash Equivalents}}{\text{Current}\text{Liabilities}}$	$\frac{\$21,000}{\$49,000}$	0.43
Solvency ratio
Debt-to-equity ratio	$\frac{\text{Total}\text{Liabilities}}{\text{Total}\text{Stockholder's}\text{Equity}}$	$\frac{\left(\$49,000+\$60,000\right)}{\left(\$512,000+\$106,000+\$71,000\right)}$	0.16
Market ratios
Price/Earnings (P/E) ratio	$\frac{\text{Market Price per Share}}{\text{Earnings}\text{per Share}}$	$\frac{\$15}{\left(\$91,000÷51,200\text{ shares}\right)}$	8.43
Dividend yield ratio	$\frac{\text{Dividend per Share}}{\text{ Market Price per Share}}$	$\frac{\left(\$148,000÷51,200\text{ shares}\right)}{\$15}$	19.27%

Table (2)

2.

To determine

Identify the company that is more efficient at collecting its accounts receivables and turning over its inventory.

Answer to Problem 4P

Company PF is the more efficient at collecting its accounts receivables and turning over its inventory.

Explanation of Solution

Company BW collecting its accounts receivable at 3.92 times a year and turns over its inventory 2.43 times a year. Whereas company PF is collecting its account receivables at 8.62 times a year and turns over its inventory 10 times a year.

Hence, Company PF is more efficient at collecting its accounts receivables and turning over its inventory.